A Nafta Battleground on the Shores of Canada

DIGBY NECK, Nova Scotia — This far-flung peninsula in the North Atlantic seems an unlikely place for an international trade dispute. But an American company’s scuttled plans to build a quarry here have turned these quiet fishing grounds into a case study of the kind of thorny disputes that threaten to derail the North American Free Trade Agreement.

Digby Neck, a remote strip of volcanic rock with a population of about 2,000, was chosen by a Delaware company, Bilcon, to be the site of a large stone quarry in 2002. Lured here by the government of Nova Scotia, Bilcon planned to blast the basalt rock that lines the shore, then load 40,000 tons of it onto a ship that would leave the Bay of Fundy each week and head to New Jersey, where it would be mixed into concrete for roads, bridges and other projects.

The quarry was expected to operate for 50 years and create about 30 local jobs in Digby Neck. Instead, the project was killed by the Canadian government after a yearslong review concluded that it would damage the environment. But Bilcon, which had invested significant sums trying to get the project underway, seized on an obscure Nafta provision allowing foreign companies to sue governments for unfair treatment.

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Bilcon sued Canada — and won. The company is seeking as much as $443 million, plus costs. While the Canadian government can fight to lower that sum, Nafta provides no appeal mechanism to reverse the underlying legal decision.

The ability of foreign companies to sue governments is one of the most contentious issues in the clash among the United States, Mexico and Canada over how to rework Nafta. The Trump administration views that section of Nafta as impinging on national sovereignty, saying it undermines government decision-making. The United States is pushing for dramatic changes in that provision that would roll back the ability of companies to bring cases under Nafta. Those changes are fiercely opposed by businesses, Mexico and — despite its loss to Bilcon — Canada.

It is the latest in a series of demands by the United States that have pushed the trade talks to the brink of collapse. President Trump campaigned on reworking the pact, which he has described as a bad deal for American workers. Negotiators are meeting every two weeks to hammer out changes to the deal. But as recently as last week, Mr. Trump continued threatening to walk away from the pact, an outcome that could disrupt corporate supply chains that span the continent and put at risk millions of jobs that are supported by commerce among the three nations.

The provision that Bilcon used — known as investor-state dispute settlement — gives a tribunal of private sector lawyers the power to rule on whether countries treat foreign investors fairly. It’s a tool that critics, including labor unions and environmental groups, say puts billions of taxpayer dollars at risk by taking power away from democratically elected governments and putting it in the hands of lawyers and multinational corporations.

Canada and Mexico have said they are open to improving the provision, but not dropping it entirely. Businesses regard it as essential to protecting their investments abroad.

Map | Digby Neck, Nova Scotia

In Digby Neck, residents like Kemp Stanton, whose family has harvested lobsters from these waters for generations, objected to the quarry over concerns that it would harm the ecosystem and the local economy, which depends on fishing and tourism from whale watching.

“It was way, way, way too big of a project for Digby Neck,” said Mr. Stanton, a retired lobsterman. He said he had already seen marine life diminish over his lifetime and decided to oppose the quarry, even donating lobster to chowder suppers to raise funds for the efforts.

“For what we were going to lose, it didn’t seem reasonable,” Mr. Stanton said.

The Canadian government commissioned an independent panel to review the project in 2003 and, after four years of deliberation, it recommended rejecting the quarry, citing its potential for “significant adverse environmental effects.” The Canadian federal and provincial governments agreed, and the project was officially killed in 2007.

Mr. Stanton and others in Digby Neck thought that was the end of the dispute. But Bilcon filed a complaint against the Canadian government, claiming unfair treatment under the investor-state dispute settlement provision. In early 2018, a Nafta panel of lawyers will begin deciding how much Canada must pay.

Mr. Stanton, leaning on a sea wall with the Bay of Fundy behind him, said he found it disturbing that a Nafta tribunal could hand down a ruling regarding his community. “Nafta allows decisions to be made by people we’ve never seen in places we’ve never heard of that directly affect us,” he said. “We have no say in it.”

The ruling favored an American company but the Trump administration is in agreement with Mr. Stanton. In the current Nafta talks, the administration has proposed dramatically curtailing the dispute settlement provision by allowing countries to “opt out” of having cases brought against them. This would essentially nullify a provision that businesses see as important to defending their rights.

“We regard that as a nonstarter,” said John Murphy, senior vice president for international policy at the United States Chamber of Commerce.

A spokeswoman for Robert Lighthizer, the United States trade representative leading the Nafta renegotiations, declined to comment, citing the confidentiality of ongoing trade talks. But at a Senate hearing in June, Mr. Lighthizer made it clear that he was not a fan of the provision.

“I’m always troubled by the fact that nonelected non-Americans can make the final decision that the United States law is invalid,” Mr. Lighthizer said.

Investors have filed 59 cases under Nafta: 16 against the United States, 25 against Canada and 18 against Mexico. While American companies, including Cargill and Archer-Daniels-Midland, have won cases against Canada and Mexico, the United States has yet to lose one.

The closest the United States came to a loss was over the Keystone XL pipeline, after the administration of Barack Obama halted work on the project under pressure from environmentalists. The Canadian company building the pipeline, TransCanada, filed a $15 billion Nafta case against the United States, seeking to recover costs and damages from the suspended project. But it withdrew the case this year, after President Trump allowed the pipeline to proceed.

The investor-state dispute provision can trace its history back to the ashes of colonialism, as rich countries looked for a way to protect investments in former colonies with weak or biased courts. Companies feared that they would invest heavily in a project, only to have the local government wrest control away from them. So countries turned to outside panels to resolve such disputes.

Nafta marked the first time such a provision was used between developed countries like the United States and Canada, which have robust legal systems. Supporters argued that it was important in case companies had problems in Mexico and to create a precedent for future pacts.

The scope of investor-state arbitration cases has expanded in recent years to provide broader protection for investors, including against “indirect expropriation” — when new regulations are passed that damage a company’s business — and unfair or discriminatory treatment based on nationality.

It was the fair treatment provision that Bilcon accused Canada of violating. The company said that it had been subjected it to a stricter review than Canadian-owned projects and that the review had focused on considerations not mandated by Canadian law. In its complaint, Bilcon claimed that Nova Scotia had wooed its business, even flying a company representative around to see potential sites in a government helicopter.

Gregory Nash, a lawyer for the family who owns Bilcon, said the case was about Canada’s treatment of good faith investors who had been invited to Nova Scotia.

“They have been treated shamefully,” he said, “in a manner that is unbecoming of Canada’s reputation as a reliable jurisdiction in which to do business.”

Some in the community agreed. David and Linda Graham, who live 10 miles north of Mr. Stanton, on the other side of the proposed quarry, said they looked favorably on the roughly 30 jobs the project would have created in an area that is losing population.

The conflict divided the community. Supporters and opponents erected signs and circulated dueling petitions, and one man spit in Ms. Graham’s face.

“A lot of people were mad at us for a very long time,” Mr. Graham said. “But I didn’t care. I had to leave here when I was young to get a job, and I would have loved to have been able to stay.”

In March 2015, the tribunal handed down its decision in favor of Bilcon. Two of the tribunal’s three members agreed that the Canadian government had been unfair, encouraging Bilcon to engage in an approval process that cost millions of dollars but was “unwinnable from the outset.”

The third arbiter, Donald McRae, said Canada had the right to reject such a potentially damaging project and called the ruling “a remarkable step backwards in environmental protection.”

For critics, the Bilcon case is a symbol of how Nafta gives the private sector discretion over government decisions. While Nafta tribunals cannot alter a country’s laws, they can force a government to pay significant sums of money in compensation. The tribunals are made up of three lawyers — one chosen by the country being sued, another by the company, and those two together choose a third.

Robert Stumberg, a professor at Georgetown Law, said the rulings in the cases can be arbitrary. “Every case,” he said, “is like rolling the dice.”

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